Restoration Hardware 2012 Annual Report Download - page 148

derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition issues. Differences between tax positions taken in a tax return and amounts recognized in the financial
statements generally result in an increase in a liability for income taxes payable or a reduction of an income tax
refund receivable, or a reduction in a deferred tax asset or an increase in a deferred tax liability, or both. The
Company recognizes interest and penalties related to unrecognized tax benefits in tax expense.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and borrowings
under the revolving line of credit approximate their estimated fair values.
The degree of judgment used in measuring the fair value of financial instruments generally correlates to the
level of pricing observability. Pricing observability is impacted by a number of factors, including the type of
financial instrument, whether the financial instrument is new to the market and not yet established and the
characteristics specific to the transaction. Financial instruments with readily available active quoted prices for
which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree
of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will
generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.
The Company’s financial assets and liabilities measured and reported at fair value are classified and
disclosed in one of the following categories:
• Level 1—Quoted prices are available in active markets for identical investments as of the reporting
date.
• Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or
indirectly observable as of the reporting date, and fair value is determined through the use of models or
other valuation methodologies.
• Level 3—Pricing inputs are unobservable for the investment and include situations where there is little,
if any, market activity for the investment. The inputs used in the determination of fair value require
significant management judgment or estimation.
The Company’s financial assets and liabilities were classified as Level 1 as of February 2, 2013, and
January 28, 2012.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). The
Company’s other comprehensive income (loss) consists of foreign currency translation adjustments.
Foreign Currency Translation
Local currencies are generally considered the functional currencies outside the United States of America.
Assets and liabilities denominated in non-U.S. currencies are translated at the rate of exchange prevailing on the
date of the consolidated balance sheets and revenues and expenses are translated at average rates of exchange for
the period. The related translation gains (losses) are reflected in the accumulated other comprehensive income
(loss) section of the consolidated statements of stockholders’ equity. Foreign currency gains (losses) resulting
from foreign currency transactions are included in selling, general and administrative expenses on the
consolidated statements of operations and have not been material in all periods presented.
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